Thursday, April 12, 2007

General economic equilibrium in World of Warcraft

One of my strange hobbies, besides playing MMORPGs, is economics. And as many MMORPGs have some sort of player-run economy, there is often opportunity to combine these two hobbies, by looking at the virtual economies of a game like World of Warcraft. Economics can explain a lot of the phenomena of a player-run virtual economy, for example auction house prices. And that isn't as simple as it often looks.

Most people are aware of the laws of supply and demand. Primal air is more valuable than primal shadow, because the motes of air drop at fewer places than the motes of shadow, and the primal air is used more frequently in crafting recipes. Thus for primal air the supply is low and the demand high, causing high prices. Primal shadow are nearly worthless, because the supply is high and the demand low.

But what is more difficult to understand is the general level of auction house prices, effects like inflation or deflation. To understand this you need to understand general economic equilibrium theory. And because most people don't understand that, you can read a lot of nonsense being told about inflation in MMORPGs.

Stated in simple terms, general economic equilibrium in World of Warcraft means that an hour of your time is worth a fixed amount of gold pieces. An hour spent killing the best possible monsters for cash, or spent for farming tradeable goods like primals, or spent gathering herbs or ores should in the end give you the same amount of value. If killing monsters for cash gave you more gold per hour than the farming of primals, somebody needing primals would rather farm gold and buy the primals on the auction house. This would decrease supply and increase demand of primals, so their auction house price would rise, until the equilibrium is reached again, and one hour farming gold or primals is worth the same. Of course that assumes that people are intelligent and always do it the most profitable and fastest way, but as long as there are enough intelligent people out there, the general economic equilibrium plays a big role in determining auction house prices.

That is most visible if you go nowadays to the auction house and check the price for low level fungible trade goods, like wool cloth or copper. With nearly everybody having characters that would easily be able to farm wool cloth, and most people being far too advanced in their tradeskills to still use wool, you might expect wool cloth to be very cheap. But if you actually want to buy some, you'd find that wool costs a lot more than you thought on an older server. That is because high-level characters don't find wool cloth on the mobs they kill for other purposes. If a high-level player wants wool, he would need to deliberately farm it. And while killing the level 20ish humanoid mobs that drop wool is fast for a high-level character, he would first need some time to travel to a location where to find those. He might be able to gather 100 wool cloth in an hour, but during this hour he could have earned a lot of gold by killing mobs in Outland, and so a stack of wool is suddenly worth a couple of gold pieces. The Burning Crusade increased the amount of gold you can farm per hour from monsters, and thus ended up increasing all the auction house prices for gathered goods, because one hour of gathering time is now worth more. This of course helps new players, because they can sell the wool they gather for much more than it was worth when everybody was low level.

So if one hour of your time is worth the same, whatever you farm, does that mean there is no room in World of Warcraft for clever money-making? Fortunately not so. What you need to do is to identify situations where the situation is out of equilibrium, and use that situation for arbitrage advantage. For example when making money gathering herbs the equilibrium price is reached because the more people are gathering herbs at the same time, the longer it takes to gather a given quantity, which keeps the prices high. But the equilibrium price is an average over all the hours of a week, and at some times there are considerably less people gathering herbs than at other times. So if you gather either add very odd hours (4 am gathering session anyone?), or during times when all those raiders are busy in Karazhan, you get more herbs per hour, and thus better profits than if you gathered at times when everybody else is doing it too.

Curiously the laws of economics also tell us that the effect of gold farmers on the economy is often misunderstood. You can often find people complaining that gold farming would bring more money into the economy, thus raising prices. But that is only the case if the gold farmers are grinding cash or items sold to NPC vendors. In reality gold farmers aren't farming gold itself, but are busy gathering items that sell well to other players, the same herbs and primals that regular players gather. That can be very annoying if you are a regular player, because you arrive at lets say the elemental plateau in Nagrand because you need primal airs and find that the place is totally overcamped, and it is hard to tag any air elementals, with so many farmers around. But if you consider the effect of this on AH prices, you'll realize that gold farmers grinding primals is actually *lowering* the general price level for primals, not increasing it. By perma-camping they maximize the supply of the primals. And as long as they make their gold by selling primals to other players, and not getting fresh cash from mobs, the money supply remains unchanged. Whatever inflation you observed in the last few months is more likely to stem from The Burning Crusade's increased hourly gold income to regular players, than from any gold farming.